WeWork – Is its story credible?

In business, I find that all companies strive to tell a compelling story and work to back it up. Apple wants us to believe that it is a luxury brand and it is here to make our life and world better. Uber wants to be the Amazon of transportation and changes the world with its services. On a higher level, a lot of companies sell the story of their operational losses on the promise of future growth and profitability. Each firm tells its story in a different way. Each tries to differentiate themselves from the herd. Whether a company succeeds is a matter of producing evidence to back up the story.

Want consumers and investors to believe in a growth narrative in exchange for present losses?

  • What is your economies of scale?
  • How is your revenue growth?
  • How does your expense compare to revenue?
  • How are this year’s numbers compared to last year’s?
  • How big is the Total Addressable Market?
  • What is it that you do makes your company better than competitors?
  • What are some success stories from your customers?
  • What is the credibility of your team?
  • What is your plan for innovation?
  • How is your free cash flow?
  • So on and so forth

The more pieces of evidence are presented to back up the story, the more likely the story can stand the scrutinizing eyes of investors, analysts and the public. In this sense, I don’t buy the story of WeWork.

It’s tricky to put a definition on WeWork, but essentially, it rents or owns a real estate and allows individuals or companies to use the space in exchange for some fees. It has grown significantly fast since its inception and is about to go public soon this year.

WeWork now has 466,000 members working out of 485 locations in more than 100 cities in 28 countries. Its revenue has grown from $75 million in 2014 to $1.8 billion last year. Three years ago, it had 1,000 employees; today, it has 12,000 and is adding 100 every week. It has installed 22 million square feet of the glass partitions that have defined an era of workplace aesthetics, and last fall, it became Manhattan’s largest tenant. (In Central London, it is second only to the British government.) In the wake of Uber’s (disappointing) debut on the New York Stock Exchange, the We Company is now America’s most highly valued start-up, at $47 billion — at least for the moment.

Source: New Yorker

On the less sexy side, WeWork lost a staggering amount of $1.9 billion in 2018, even more than Uber, and $700 million alone the first quarter of 2019 (Business Insider). The economics of the model can pose trouble, particularly in times of an economic downturn. If an economic crisis forces knowledge workers and companies to retreat from renting out WeWork space, the company will be saddled with fixed costs which are their leases or related to owning buildings. Regus had a similar model to WeWork in 2000s, became the darling of Wall Street and went bankrupt shortly after.

In addition, there are other signs that I think are troubling at the very least.

He is known for making bombastic pronouncements, like this one at an all-company event last year: “There are 150 million orphans in the world. We want to solve this problem and give them a new family: the WeWork family.” In L.A., Neumann told his employees that the newly formed We Company would now have three prongs — WeWork, WeLive, and WeGrow — with a single, grandiose mission: “to elevate the world’s consciousness.”

As Neumann recently told a person close to the company, he believes that WeWork’s size and scale could put it in a position to help deal with some of the world’s largest problems, like the refugee crisis, saying, “I need to have the biggest valuation I can, because when countries are shooting at each other, I want them to come to me.”

Source: New Yorker

What is the focus of WeWork now? Is it to be profitable in the real estate or coworking space? Or is it to change the world and help orphans? The potential “hands on multiple jars” approach is not a welcome sign in the times when the company loses a massive sum from operations every year.

The idea that countries need to come to WeWork to solve political and social conflicts seems more delusional than wildly ambitious.

In 2017, Neumann declared that WeWork’s “valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.” He has long maintained that categorizing WeWork as a real-estate concern is too limiting; it is a “community company” with huge ambitions. “We are here in order to change the world,” Neumann said that same year. “Nothing less than that interests me.”

Source: New Yorker

What does “it is based on our energy and spirituality than it is on a multiple of revenue” even mean?

It has lately been investing more in technology to better understand how people use its space, and Shiva Rajaraman, WeWork’s CTO, described a typical WeWork to me as “an Amazon warehouse with a lot more soul.” The company uses data to improve its management of conference rooms and analyze its customers’ interests to better plan community events. (Rajaraman said the company had found that WeWork members in Brooklyn and San Francisco enjoyed “urban gardening.”) The manager of a WeWork space in Flatiron told me that “one of our best learnings” since opening was that people liked sitting at several desks in the back of the room that were near the windows. This, he said, was something they hadn’t guessed, before admitting it “makes a lot of sense.”

Source: New Yorker

More demand for coffee in the morning and people preferring desks near the windows are new revelations? It doesn’t really sound like compelling evidence of great artificial intelligence or future revenue stream.

On a practical level, SoftBank’s cash infusion helped WeWork cover the increasing costs of its whirlwind expansion as the real-estate market got more expensive. It also began spending heavily to fill all the desks it was adding. Just a few weeks after SoftBank’s investment, Shlomo Silber, the owner of Bond Collective, a  New York–based co-working company, turned on his phone at the end of Rosh Hashanah to find dozens of his customers had forwarded an email from WeWork offering to buy them out of their leases and give them as much as a year of free rent. WeWork’s occupancy rate went up, but the deals made it difficult to determine the natural demand for its product. WeWork employees in multiple cities told me that savvy companies would take advantage of a few months of free rent in one WeWork, then wait for a new location to open so they could move and take advantage of another deal.

Source: New Yorker

A high valuation for a money-losing startup needs to come with robust proof of significant demand. If demand in this case is inflated, will the valuation still be reliable or justified?

Just before last Christmas, Masayoshi Son called Neumann with bad news: A plan for SoftBank to invest $16 billion into WeWork, including $4 billion it had already promised — and to become its majority shareholder — was dead. The stock market had tanked, and the Vision Fund’s investors, including Saudi Arabia, were hesitant to invest more in real estate. SoftBank ended up investing another $1 billion in WeWork, and buying another $1 billion of stock from employees and other investors. This was more money than Neumann’s smaller rivals had raised combined, but it was still a disappointment, and presented as such in the media. At the company summit in January, Neumann told employees that news coming from outside the company was often “fake or misinformed.” (In 2017, he told the Economic Club of New York he thought fake news was “a great term.”)

Source: New Yorker

When even your biggest advocate scaled back the support and confidence…

A lot more details can be found in the profile by New Yorker. Above are just notable pieces that I think can tell a lot about the company and its CEO. Kudos to WeWork for what they have done so far. Noone should deny the credit they deserve. As they already have 24% of their desks are occupied by companies with more than 100,000 employees (Wired), there is a reason to believe that WeWork will be able to stick around, even in tough times. However, the hype and the gigantic valuation, I think, are a bit excessive. The evidence isn’t convincing enough. The evidence for concern, so far, has been, though.

Adobe’s Q2 2019 Performance

In this post, I am looking at Adobe’s Q2 top line performance compared to Q2 2018 and Q2 2017. Disclaimer: I have Adobe in my personal portfolio. The data was retrieved from Adobe’s official quarterly reports. Before we go further, it’s important to look at what the segments entail

  • Digital Media:
    • Creative
    • Document Cloud
  • Digital Experience (Experience Cloud)
  • Publishing

Overall, revenue YoY growth in 2019 increased compared to that in 2017. Revenue growth in both years stood at mid 20s. However, gross profit and particularly, operating income slipped.

In terms of segment revenue YoY growth, product and services improved in 2019, compared to 2018. While subscription revenue YoY growth slightly decreased in 2019, compared to that in 2018, the figures in both years are still higher than those of Product and Services.

Subscription and Services saw their Gross Margin slightly slip across the last 3 Q2s, both outperformed by Product. It’s obvious that Subscription and Product are significantly more profitable than Services.

With regard to segment revenue as % of Total Revenue, all three segments look pretty consistent over the past 3 Q2s.

When YoY revenue growth is looked at, Publishing and Digital Experience impressed, compared to Digital Media

However, Digital Media and Publishing are more profitable to Adobe than Digital Experience

If we simply look at YoY revenue growth from subscriptions in these segments, Digital Experience significantly improved in 2019 compared to 2018 while Publishing stagnated in 2019.

At a lower level, inside Digital Media, while Document Cloud revenue grew pretty much at the same pace in 2019 as in 2018, Creative Cloud revenue growth slowed in 2019.

In terms of ARR, Adobe looks to be in good shape. I didn’t do a YoY analysis since they showed numbers in different currency rates

Source: Adobe

Appendix

Superhuman – How to take in customer feedback, communicate and more

The Founder and CEO of Superhuman, a red-hot email application, explained on Medium the changes made to the service after customer feedback poured in regarding a few features. You can read about the entry here. There are a few points that stood out for me from the post

Quick response shows how you truly take customers seriously

Upon reading this, I am pleased to see the quick response from an executive to customer feedback. It shows that at least the company took customers seriously to issue such an official response. Whether the answer is sufficient to please the troubled customers remains to be seen, but at least the effort is laudable. In the age of abundance in information, products and services, customer satisfaction is a commodity, a luxury and a differentiation that should be among the highest priorities. In this sense, Superhuman did well.

Don’t under-estimate the power of genuine apologies

Another point that I noticed in this post is that the CEO kept apologizing. I am not sure if the “read status” feature was originally and intentionally conceived by Superhuman, and it doesn’t matter. The apology is a welcome sign. I am of the belief that if you make mistakes, an apology and ability to avoid the same mistakes will earn back the trust of customers in time. Sometimes, I see companies go above and beyond trying to dodge their liabilities and find “force majeure”-like excuses. Just own up to your mistakes and apologize. Sincerely. We, human-beings, have a great ability to forgive. Don’t underestimate it.

Publishing contact details shows you are willing to listen

Jeff Bezos makes his email public and so does this CEO of Superhuman. Though I am not naive enough to think that a response is guaranteed, having their contact details public at least makes these folks look more accessible and friendly to ideas and feedback. Compared to a lifeless “contact us” page, this seems significantly better.

Are we going to have 5G in the US soon?

First of all, what is 5G? 5G is generally seen as the fifth generation cellular network technology that provides broadband access (Wikipedia). The technology, in theory, allows for support for many more devices in the same area and much faster speed than the current 4G technology. It has been touted as one of the core components in our future society and received a lot of hype in the past few years. Here is what Loup Ventures has to say about when 5G is going to be commonly available:

On June 28th, T-Mobile will be the 4th US carrier to “launch” 5G in the US with 6 initial cities. While encouraging, we’re still in the buildup phase, likely two years away from the average consumer using 5G. To put this into perspective, we believe, by the end of 2022, about 75% of the US population will have access to 5G, essentially 2 years behind AT&T’s recent estimate of roughly 66% by the end of 2020. 

Loup Ventures Newsletter 29th June 2019 Issue

But are we though?

Wired has a great article on the different approach the US chose for 5G adoption, compared to other countries. Here is a quote that summarizes well such a difference (a bit long)

“…The traditional sweet spot for wireless service has been in what we call low-band or mid-band spectrum. This is between 600 MHz and 3 GHz. For a long time, these airwaves were considered beachfront property because they send signals far. In other words, they cover wide areas but require little power to do so. This makes them especially attractive for service in rural areas, where technology that can reach more people with less infrastructure makes greater economic sense.

For 5G, however, the United States has focused on making high-band spectrum the core of its early 5G approach. These airwaves, known as “millimeter wave,” are way, way up there—above 24 GHz. They have never been used in cellular networks before, and for good reason—they don’t send signals very far and are easily blocked by walls. That means they are very expensive to build out. On the flip side, these airwaves offer a lot more capacity, which translates into ultrafast speeds.

The United States is alone in this mission to make millimeter wave the core of its domestic 5G networks. The rest of the world is taking a different approach. Other nations vying for wireless leadership are not putting high-band airwaves front and center now. Instead, they are focusing on building 5G networks with mid-band spectrum, because it will support faster, cheaper, and more ubiquitous 5G deployment. Take China, which allocated large swaths of mid-band spectrum for its carriers last year, clearing the way for deployment in a country that is also home to Huawei, the largest telecommunications equipment supplier worldwide. South Korea and Australia wrapped up an auction of key mid-band spectrum last year. At roughly the same time, Spain and Italy held their own auctions for mid-band airwaves. Austria did the same earlier this year. Switzerland, Germany, and Japan also auctioned a range of mid-band spectrum just a few months ago. The United States, however, has made zero mid-band spectrum available at auction for the 5G economy. Moreover, it has zero mid-band auctions scheduled.” –

Wired – Choosing the wrong lane to race to 5G

In short, to access the very high-speed 5G in the US, you need to live close to the towers. The farther you live from them, the worse the connection will be. All would be OK if it were easy and cheap to build those towers everywhere. But it’s not.

Per Wall Streets Journal:

This is the paradox of 5G, the collection of technologies behind next-generation wireless networks: They require a gargantuan quantity of wires. This is because 5G requires many more small towers, all of which must be wired to the internet. The consequences of this unavoidable reality are myriad. The 5G build-out, which could take more than a decade, could disrupt our commutes, festoon nearly every city block with antennas, limit what cities can charge for renting spots on their infrastructure to carriers on which to place their antennas, and result in an unequal distribution of access to high-speed wireless, at least at first.

In a 2017 report, Deloitte Consulting LLP principal Dan Littmann estimated that it will take combined carrier spending of between $130 billion and $150 billion in order for most Americans—including those in rural areas—to have a choice of providers of high-speed broadband and 5G wireless. Marachel Knight, the senior vice president in charge of rolling out 5G at AT&T, says her company estimates it will take a decade to completely build out its 5G network.

The driving force behind this enormous build-out is that 5G networks don’t work like previous wireless cellular networks. Where 2G, 3G and even 4G rely on large towers with powerful antennas that can cover many square miles, the shorter-range, higher-frequency radio waves used by 5G networks—essential to their ability to deliver the 10- to 100-times faster speeds they promise—mean that 5G networks must have small cells placed much closer together.

Typically these small cells must be placed about 800 to 1,000 feet apart, says AT&T’s Ms. Knight. Small-cell antennas are typically the size of a pizza box, but can be much larger, and require both a fiber-optic connection to the internet and access to power. They go wherever there’s space: on buildings, new 5G-ready telephone poles and, often, retrofitted lampposts. In 2018, the U.S. had 349,344 cell sites, according to CTIA, a wireless industry trade organization. The organization estimates that—to achieve full 5G coverage—carriers will have to roll out an additional 769,000 small cells by 2026.

In a nutshell, I don’t think we are going to have 5G for the majority of Americans soon. There may be a portion of the population who fortunately will have access to the technology. The rest will have to wait till the infrastructure is amply built.

When it comes to hyped technology, I think it’s always a good idea to be vigilant, avoid the hype, go into more details and take a more conservative stance. We don’t lack examples of techs that have been hyped for years but are nowhere near to being common: AI, autonomous vehicles, 5G…

Heck, a lot of Americans don’t have access to Internet

What I think about when I think about modern workplaces

I was asked about this question at work and I’d like to share my thoughts on the matter here. When I think about modern workplaces, I think about the following

A modern workplace is flexible

In a modern working environment, employees should be given flexibility, for example, in remote working, maternity leave, working hours or even choosing between open office or cubicles. Our work isn’t our life. As technology advances, we should be able to afford letting folks work remotely, if circumstances call for it. I am not saying everybody should start walking out of office and working from home. However, if there is an emergency at home or the weather is awful enough, working remotely should absolutely be an option.

The days when we have to punch in cards from 9 to 5 everyday are over. Employees should be able to set up the time to work, provided that they are in agreement with the management. As long as work gets done, why does it matter if somebody starts at 7am and leaves at 3pm?

One of the issues that I discussed with a colleague was whether we should switch from our high cubicles now for open floor plan. Well, they are not mutually exclusive. I do believe each of us should have some privacy given by the cubicles, but companies, if they can afford it, can set up a community space where people can relax and mingle.

Do I even need to articulate on maternity leave? Men and women alike should be given time off to take care of their new born children.

A modern workplace puts employees’ well-beings first

Numerous studies show that sitting too long in front of screens is detrimental to our health and eyes. Knowledge workers are supposed to spend 8 hours on average every day in front of computers. A modern workplace should be able to help employees work efficiently while protecting their health. Of course, wellness facilities and programs are always appreciated.

Mental illnesses pose a serious issue in our society. Modern workplace should have measures in place to help those in need for mental assistance. Otherwise, how would we be different from the 1950s?

A modern workplace comes with modern tools

If your workplace has computers with Windows XP, 2GB of RAM without sufficient applications to do your job well or if your office doesn’t have a system to keep everybody comfortable from the summer heat or winter cold, will it be something of our modernity? Absolutely not. Besides the basic infrastructure to keep employees safe and comfortable, companies should commit to giving employees the necessary tools to function. If you have to keep your applications fast and reliable at all times but the Internet is crappy, how could you deliver what was asked?

News Outlets and How NOT To Stand Up Paywalls

News websites generate revenue mostly through either subscriptions, contributions or ads. Some offer exclusive content via subscriptions such as Washington Post, some offer content for free such as cnbc, bbc and others operate as a hybrid, providing free access to most articles while holding out a select few for only subscribers.

To get readers to subscribe, you need to deliver not only great content, but also a pleasant user experience. TechCrunch has been particularly awful in this regard of late. As a frequent reader or at least I used to be, I am disappointed by their new approach. A short while ago, you could read TechCrunch with your adblock app on. Now, here is what you are greeted on the website

Unless you turn off your adblock or subscribe, you can’t even see what is available. Even Washington Post lets you see the homepage and only shows the paywall after you click on a specific article. But even after you turned off all ads blockers, the annoying message still shows up

Meanwhile, CNBC, which is another major business news outlet, takes a much more user-friendly approach with adblock

The design trick is aimed to implicitly persuade you to turn the blocker off, but you can certainly leave it on and continue reading CNBC articles.

Saigoneer, a news website that covers happenings in Vietnam, has a similar idea to CNBC, though the homepage is covered completely by this message. I turned ads blocker off a few times before I realized that clicking on the black bar will allow me to continue reading it freely.

Or news outlets can just follow what The Guardian does: offer content for free and ask nicely for contribution

Here is the success that The Guardian had from their approach

Today the Guardian has 650,000 regular paying members, 360,000 of which are recurring paying members and 290,000 pay for print papers and digital memberships, according to the publisher. In the last year, it received more than 364,000 single contributions from around 318,000 contributors. In the last three years, the title received 1 million paid donations — a mix of one-offs, recurring paying members, and print sales.

Source: Digiday

In short, I hope that whatever TechCrunch is trying to do has been working for them. Personally, I became frustrated with their paywall and since their free articles are available on other news channels anyway, I have frequented to other websites more and abandoned what used to be one of my favorite sites.